Tags: dollar | oil | euro | currency

Strong Dollar Confounding Commodity Bulls

By
Wednesday, 24 Sep 2014 08:09 AM Current | Bio | Archive

September is shaping up as a tough month for commodity bulls. Spot gold prices have dropped almost 6 percent since Labor Day weekend. The yellow metal touched an eight-month low last Friday.

Energy speculators haven't had an easier time. West Texas Intermediate crude is getting perilously close to $90. At that level, according to my sources (who actually are in West Texas), many newer shale oil and gas projects will go into negative cash flow. Owners will likely shut them down if the price doesn't recover in a few weeks.

Casual gold bugs and oil bulls often forget that their returns depend heavily on the U.S. dollar's exchange rate. You can blame a strong greenback for a good part of the recent hard asset weakness.

Investors who expected dovish Federal Reserve policy and excessive spending by the Obama administration to kill the dollar missed something important: Currency values are relative.

Are there plenty of reasons to be bearish on the dollar? Yes, of course. The same is true for the Japanese yen, the euro, the British pound, the Canadian dollar and every other currency on the planet.

However, you cannot sell one currency without simultaneously purchasing another one. If all the choices are bad, you have to buy the "least bad" one. More often than not, that choice led capital into the U.S. dollar the last few years.

Europeans understand this. Their central bank is doing everything it can to debase the euro, even sending some very short-term interest rates into negative territory.

Japanese people get it, too. The Abe administration and the Bank of Japan are conspiring to create untold trillions of yen from thin air in a desperate attempt to spur inflation. Will it work? No one knows, but from their perspective, they have little choice but to try.

To the extent anyone on the planet wants a "flight to safety," the place to find it is in the U.S. dollar. We have the world's deepest capital markets. We have instant liquidity. We have enough nukes to make sure no one forecloses on the Treasury.

Does our banking system operate on a wing and a prayer? Yes, but it has more wings than anyone else does.

We may be a deadbeat nation, but we are less deadbeat than the alternatives are. Our currency will be king of the mountain until someone knocks us off. Someday it will happen, but not this year.

I expect the dollar to stay strong until Europe and Japan get their own economies back on track — which won't be this year or next. That means dollar-denominated commodities like gold and oil face a tough headwind. Watch out if you own either of them.

© 2017 Newsmax Finance. All rights reserved.

 
1Like our page
2Share
PatrickWatson
September is shaping up as a tough month for commodity bulls. Spot gold prices have dropped almost 6 percent since Labor Day weekend. The yellow metal touched an eight-month low last Friday.
dollar, oil, euro, currency
449
2014-09-24
Wednesday, 24 Sep 2014 08:09 AM
Newsmax Inc.
 

Newsmax, Moneynews, Newsmax Health, and Independent. American. are registered trademarks of Newsmax Media, Inc. Newsmax TV, and Newsmax World are trademarks of Newsmax Media, Inc.

NEWSMAX.COM
MONEYNEWS.COM
© Newsmax Media, Inc.
All Rights Reserved